Asian markets sink on contagion fears after US Bank collapses

March 14, 2023 (MLN): Investors in Asian markets were in for a rude shock on Tuesday as banks bore the brunt of a widespread sell-off.

The collapse of two US lenders, Silicon Valley Bank, and Signature Bank, raised fears of contagion in the banking sector and prompted authorities to pledge support for other lenders and depositors. While US authorities sought to reassure investors, shares in several US banks took a hit on fears of a potential run by customers.

The collapse of Silicon Valley Bank, which specialized in venture-capital financing largely in the tech sector, was largely due to the Federal Reserve's sharp interest rate hikes aimed at quelling inflation.

The sudden closure of the bank, followed by Signature Bank days later, wiped off around $465 billion in the market value of global financial stocks in just three days.

Several commentators and leading banks have called on the Fed to pause its tightening campaign and provide stability to financial markets. Some have even suggested that the Fed could cut borrowing costs to prevent a potential recession. However, yields on government bonds around the world have tumbled in light of the crisis, and analysts warn that the risk of a global economic slowdown has grown.

Equity markets in Tokyo, Sydney, and Seoul were almost two percent down, while Hong Kong, Shanghai, Singapore, and Taipei suffered hefty selling. Among banks in the region, Mitsubishi UFJ Financial and Sumitomo Mitsui Financial Group each shed more than seven percent in Japan, while Hong Kong-listed HSBC sank more than three percent.

National Australia Bank was off more than two percent, and South Korea's KB Financial Group fell three percent.

Despite non-US banks having little exposure to the firms in trouble and global financial systems being flush with cash, investors remain cautious. Stephen Innes of SPI Asset Management warns that "US financial stress could lead banks of all stripes to retrench lending to the real economy and tighten broader financial conditions, the amplifying risk to the broader markets. And a lower rates environment would likely hit worldwide banks' profits."

Investors are now nervously awaiting the release of US consumer inflation figures this week. A forecast-beating figure could pose a significant challenge for the Fed in light of the SVB crisis. Mary Manning of Alphinity Investment Management states that "a policy mistake is hands down the biggest risk in the market. Controlling inflation but also addressing the fact there is some instability in the banking system is difficult."

The risk of a financial crisis remains elevated, and investors have rushed to reduce their exposure to the sector.

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